Published 11:00 pm, Sunday, October 19, 2014

INSTITUTE FOR POLICY INNOVATION

A yearly $14.7 billion tax increase could be in place as early as mid-December courtesy of the leaders of the U.S. Senate.

Almost immediately after the World Wide Web made its debut some folks were hard at work figuring out a way to muscle in on the action. Some proposed taxing Internet access while others wanted to charge a higher tax on items bought via the Web than if that same item had been bought at a brick-and-mortar store. This Internet looting led to the passage of the Internet Tax Freedom Act (ITFA) in 1998, 16 years ago.

Originally intended to be permanent but negotiated down to temporary, and grandfathering in jurisdictions that were already taxing Internet access to give them time to adjust their tax codes and budgets, the law put in place a moratorium on “Internet taxes,” that is, taxes on Internet access and on multiple or discriminatory taxes on Internet commerce. Since then, ITFA has been extended several times, including recently when it was extended until Thursday, December 11—or what we should dub another Black Thursday.

The American Action Forum released an analysis showing that the cost to taxpayers would be $14.7 billion annually. This tax increase is the very real cost of failing to extend the moratorium permanently.

Who would support this massive tax increase in the middle of a still struggling, sluggish economy? As the private and public sectors spend millions of dollars to ensure people have broadband access, why impose a new tax that will disproportionately affect those least able to pay?

The only thing holding back a permanent moratorium and removing the grandfathered jurisdictions seems to be the Senate, where Senators Harry Reid and Dick Durbin are holding the moratorium hostage as they try to find a way to force through something oxymoronically named the Mainstreet Fairness Act (MFA).

The proposal would do away with any requirement that a business have a physical connection to a jurisdiction before it can be forced to levy taxes on its sales. If this law were to pass, a person merely calling up a business’s Website would be enough to require that a business pay taxes in the state where the customer resides. Out-of-state tax authorities could audit businesses in any state. A discriminatory Internet tax would look promising by comparison.

But holding the moratorium hostage to the MFA is illogical at best, and perhaps legislative malpractice. The moratorium staves off a huge tax increase, while the MFA enables vastly broader powers for tax authorities. Virtually opposite goals.

In addition, the MFA is fundamentally about where a taxable transaction takes place, a far more complicated discussion than a prohibition on discriminatory taxation. The MFA is appropriately fully debated in the context of how location-based taxation should be handled in an age of digital transactions, not smuggled through Congress via some hidden trick in an attempt to please a narrow constituency.

The number of cosponsors and the congressional committee votes demonstrate that a permanent moratorium that removes the grandfathered jurisdictions has a huge margin of support. However, if the two bills are forced together in the Senate nothing will pass, and the country will labor under another huge tax increase.

Today's TechByte was written by IPI Resident Scholar for Tax and Innovation Policy, Bartlett D. Cleland.